30 Jan 2022

RBI to have a difficult task of managing inflation and borrowing

Given expected growth of 13% in fiscal 2022-23 and a fiscal deficit pegged at 6% of GDP, net government borrowing is likely to be at around Rs 7 trillion. Coupled with state government borrowing the supply will still be heavy and RBI will be hard pressed to manage the borrowing if inflation continues to rise.

author dp
Team INRBonds
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Expect Central plus states borrowing at over Rs 13.5 trillion net

 

Fiscal deficit as % of GDP was pegged at 6.8% of GDP for last fiscal year and  it will come down in fiscal 2022-23 given higher tax revenues. However the government will not move towards FRBM targets of 3% of GDP starting this year given the need for growth and also a populist budget in the face of rising fuel prices that have doubled over the last 2 years. Fiscal deficit is likely to come down to 6% of GDP from 6.8% of GDP in Union Budget 2022-23.

 

Fiscal deficit of 6% of GDP given a nominal GDP growth of 13% will see deficit at Rs 10 trillion plus of which 65% is funded by government borrowing.

 

States too will borrow around Rs 7 trillion this year, the same as last year and total bond supply from centre and states could be in the range of Rs 13.5 trillion.

 

RBI bought Rs 2.2 trillion of bonds this fiscal year and still yields rose by over 70bps and with worries of Fed rate hikes, inflationary budget and borrowing, RBI will be hard pressed to contain yields.   

 

 

FY22(BE)

FY21

FY20

Fiscal Deficit

6.80%

9.50%

4.59%

Gross Borrowing (Rs billion)

12000

13703

7100

Net Borrowing (Rs billion)

9317.21 

11431

4740

 

Market borrowing in FY22(as of 28th Jan)

Rs billion

Gross Market Borrowing

10698

Net Market Borrowing

8553

 

Government bonds, SDL and OIS yield movements

 Last week, 6.54% 2032 paper yield rose by 15 bps to 6.77% while 6.10% 2031 yield rose by 12 bps to 6.75%. 5-year benchmark bond, 5.63% 2026 yield increased by 4 bps to 5.98%. 6.64% 2035 yield gained 11 bps to 7.18%. Long-term paper, 7.16% 2050 yield rose by 7 bps to 7.33%.

 

The spread of 10-year bond over 5-year bond rose to 77 bps from 69 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined to 45 bps from 43 bps while 30-year benchmark over 10-year benchmark spread decreased to 57 bps from 64 bps on weekly basis.

Average 10-year SDL auction cut-off rose to 7.27% from 7.24% in previous week while spread remained steady at 61 bps.

 

On weekly basis, 1-year OIS yield rose by 8 bps 4.49% while 5-year OIS yield increased by 8 bps to 5.7%.

 

 

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